Preliminaries

I. Course Code CAC 102

II. Course Title COST ACCOUNTING AND CONTROL

III. Module Number 3 (FINAL)

IV. Module Title PROCESS COSTING -Part 2 and JOINT PRODUCT and BY PRODUCT COSTING

V. Overview of the Module Process Costing topics will cover topics involving different inventory
procedures namely Average and First In First Out. The quantity schedule, the
costs charged to the department and the costs accounted for shall be the
major parts of the production reports and its accompanying supporting
schedules.

It will also cover the allocation of joint costs for joint products and by products.

VI. Module Outcomes Cost of production report and related necessary journal entries.

Lesson Number 1
Lesson Title Process Costing – Average Method

Lesson Objectives: At the end of the lesson, the student is expected to

1. Illustrate and discuss the costing method using average costing
2. Prepare cost of production report for first and succeeding department using average
costing method.

Getting Started (Optional)

The midterm coverage illustrated cost of production report listing the work in process ending
inventories. These inventories become the beginning inventories of the next period. There are two
methods of accounting these beginning inventories namely:

1. Average costing

2. First in first out costing.

Discussion and Application

In average cost method, the cost of the work in process inventory is merged with the cost added by
the department in the current period. Thus, there will be an average unit cost to be assigned.
Average Unit Cost

Cost from beginning inventory + Cost added during the period/equivalent production

The quantity schedule will have work in process inventory beginning inventory.

Units in process beginning inventory XXXX

Units started in process (for first department)
Units received from preceding department (for next department) XXXX XXXX
Units completed and transferred to next department XXXX
Units still in process XXXX
Units lost in process XXXX XXXX

The cost charged to the department will show in detail the cost of the work in process inventory.

For the first department

Cost added by the department:

Work in process – beginning inventory:
Materials P XXXX
Labor XXXX
Overhead XXXX
Cost added during the period:
Materials P XXXX
Labor XXXX
Overhead XXXX
Total cost added PXXXX
Total cost to be accounted for PXXXX

For the succeeding department(s)

Cost from preceding department:

Work in process, beginning inventory P XXXX
Transferred in during the month XXXX
Adjusted cost from preceding department PXXXX
Cost added by the department:
Work in process – beginning inventory:
Materials P XXXX
Labor XXXX
Overhead XXXX
Cost added during the period:
Materials P XXXX
Labor XXXX
Overhead XXXX
Total cost added PXXXX
Total cost to be accounted for PXXXX
 The cost accounted for as follows will just be the same as discussed during the midterm period.

Equivalent production computation and treatment to lost units will be the same as discussed in the
midterm period.

Ilustration:

Callalili Company produces vitamins in two departments: Mixing and Compounding and Packaging
departments. The company uses average costing. For October, in the Mixing department, the ending
inventory is complete as to materials and ½ complete as to labor and factory overhead, and lost units
occur at the end of the department’s processing. In the Compounding and Packaging Department, the
ending inventory is 2/3 complete as to labor and overhead.
Compounding
Mixing and Packaging
Department Department
Production data (in units)
Beginning inventory 1,000 500
Started in process 15,000 -
Received from prior department 12,500
Transferred out 12,500 11,500
Ending inventory 3,000 1,500

Cost summary:
Beginning inventory:
Cost from prior department P650
Materials P980 -
Labor 230 175
Overhead 400 100
Cost for October
Materials 15,020 -
Labor 5,570 6,700
Overhead 8,300 4,275

Required: Prepare cost of production report for Mixing Department and Compounding
and Packaging department.
 Callalili Company
Mixing Department
Cost of Production Report
For the month of October, 202A
Quantity Schedule
Units in process beginning inventory 1,000
Units started in process 15,000 16,000
Units completed and transferred to next department 12,500
Units still in process 3,000
Units lost in process 500 16,000

Cost Charged to the Department

Cost added by the department:
Work in process – beginning inventory:
Materials P 980
Labor 230
Overhead 400
Cost added during the period:
Materials P 15,020 P1.00
Labor 5,570 0.40
Overhead 8,300 0.60
Total cost to be accounted for P 30,500 P 2.00

Cost accounted for as follows:

Completed and transferred to next Department
(12,500 X P2.00) + (500 X P2.00) P 26,000
Work in process ending inventory:
Materials (3,000 x 100% x P1.00) P 3,000
Labor (3,000 x 50% X P0.40) 600
Overhead (3,000 x 50% x P0.60) 900 4,500
Total cost accounted for P30,500

Additional Computation:

Equivalent Production

Materials 12,500 (100% complete) + 3,000 (100% complete) +

500 (100% complete) = 16,000 units
Labor and overhead 12,500 (100% complete) + 3,000 (1/2 complete) +
500 (100% complete) = 14,500 units
Unit Cost:
Materials P980 + P15,020/16,000 = P1.00
Labor P230 + P5,570 /14,500 = P0.40
Overhead P400+ P8,300/14,500 = P0.60
 Callalili Company
Compounding and Packaging Department
Cost of Production Report
For the month of October, 202A
Quantity Schedule
Units in process beginning inventory 500
Units received from the Mixing Department 12,500 13,000
Units completed and transferred to next department 11,500
Units still in process 1,500 13,000

Cost Charged to the Department

Cost from preceding department:

Work in process, beginning inventory P 650
Transferred in during the month 26,000
Adjusted cost from preceding department (P26,650/13,000) P26,650 P 2.05

Cost added by the department:

Work in process – beginning inventory:
Labor P 175
Overhead 100
Cost added during the period:
Labor 6,700 0.55 Overhead
4.275 0.35
Total cost added P11,250 P0.90
Total cost to be accounted for P37,900 P2.95

Cost accounted for as follows:

Completed and transferred to Finished Goods (11,500 x P2.95) P 33,925
Work in process ending inventory:
Adjusted cost from Department 1 (1,500 x P2.05) P 3,075
Labor (1,500 x 2/3 x P0.55) 550
Overhead (1,500 x 2/3 x P0.35) 350 3,975
Total cost accounted for P 37,900

Additional computation:
Equivalent Production:
Labor and overhead 11,500 (100% complete) + 1,500(2/3 complete) = 12,500 units
Unit Cost
Labor P175 + P6,700/ 12,500 = P0.55
Overhead P100+ P4,275/12,500 = P0.35
Summary of the Lesson

 Under average costing method, there is only one unit cost for each cost item.
 The cost of the beginning inventory is added to the current cost incurred by the
department to arrive at an average unit cost.
 The degree of completion of the beginning inventory is disregarded in computing the
equivalent production.

Enrichment Activities

At the beginning of September, the Elly Corporation had P27,950 (direct materials – P7,800,
conversion cost – P20,150) in Department A’s beginning work in process inventory. The inventory
consisted of 15,500 units which had 100% of direct materials and 65% of conversion cost. During
September, 36,000 units were started in process. Cost incurred during the month were: direct
materials – P54,000; conversion costs P79,000. As the 48,000 units were completed, they were
immediately transferred to Department B. At the end of September, 3,500 were still in process and are
100% complete as to materials and 45% converted.

Required: Cost of production report using average method.

Assessment

Consider the following data for the Assembly Department of Pink Manufacturing Company:

Quantity: Work in Process - May 1 80

Started in May 202A 500
Completed during May 202A 460
Work in Process – May 31, 202A 120

Stage of Completion: Work in Process May 1 Work in Process May 31

Materials 90% 60%
Conversion costs 40% 30%

Cost Data Materials Conversion Cost

Work in Process – May 1 P 49,336 P 9,104
Cost added during May 322,000 139,200

The Assembly department uses the average method of process costing.

Required: Cost of production report for the month of May.

Suggested Links
1. https://xplaind.com/267146/process-costing-weighted-average
References
1. De Leon (2019), Cost Accounting and Control 2019 Edition: Manila GIC Enterprise & Co., Inc (Text Book).
2. Rante (2013) Cost Accounting 2013 Edition : Manila: Millenium Books Inc.
3 Cabrera, M. E. B. (2019) Cost Accounting and Control 2019 Edition) Manila: GIC Enterprise & Co. Inc.
Lesson Number 2

Lesson Title Process Costing – First In First Out

Lesson Objectives: At the end of the lesson, the student is expected to:
1. Illustrate and discuss the costing method using FIFO method
2. Prepare cost of production report of the first and succeeding department FIFO
method

Getting Started (Optional)

Discussion and Application

The first in first out method may be used to account for the beginning work in process inventory.
The work in process inventory costs remain to be separated from the current cost incurred by the
department and not averaged with the new costs. Thus, there will be one unit cost from goods
completed from the beginning work in process inventory and another unit cost from the goods
completed during the period.

The cost of completing the units in the beginning inventory is computed first, followed by
computing the cost of the goods started and completed during the period.

Thus, the degree of completion for both work in process beginning and ending are considered.

The quantity schedule will be the same. However, the cost charged to the department and the cost
accounted for will be different.

The cost charged to the department will present the work in process beginning inventory in total
followed by current cost transferred in from the preceding department for the succeeding department
and the cost added by the department. This is shown below.

Cost charged to the department

Work in Process, beginning inventory PXXXX

Cost from preceding department:

Transferred in during the period PXXXX

Cost added during the period:

Materials PXXXX
Labor XXXX
Overhead XXXX
Total cost added PXXXX
Total cost to be accounted for PXXXX
 The cost accounted for as follows will show the cost of completed and transferred considering first
the cost of beginning inventory with the necessary cost to complete and the cost of the units started
and completed during the period. The work in process ending inventory will be the same as previously
discussed. This is shown below.

Cost accounted for as follows

Cost completed and transferred to the next department:

From Beginning inventory:
Inventory cost P XXXX
Labor added XXXX
Overhead added XXXXX PXXXX
From current production XXXX
PXXXX
Work in process, ending inventory:
Cost from preceding department PXXXX
Material XXXX
Labor XXXX
Overhead XXXX XXXX
Total cost accounted for PXXXX

Equivalent Production Computation

Below is a simpler way to compute.

Work in Process Beginning inventory (100% - % completed work last period) XXXX
Started and completed this period XXXX
Work in process ending inventory (completed this period) XXXX
Equivalent Production XXXX

Treatment for lost units will be the same as discussed in the midterm period.
Illustration:
Cannery Corporation uses the FIFO process costing method. All spoilage that occurred in
Department 2 during June was normal and applicable to units received during June from the preceding
department.
June cost data for Department 2 were as follows:
Beginning Current
Inventory Cost
Cost transferred in from Department 1 P13,200 P91,200
Conversion cost 6,000 60,000

The Department 2 beginning inventory (2/3 converted) was 1,200 units and 8,000 units were
transferred in from Department 1. The ending inventory was 1,000 units (1/2 converted), and 7,800
units were transferred to Department 3.

Required: Cost of production report for Department 2 for the month of June.
 Cannery Corporation
Department 2
For the month June, 202A
Quantity Schedule
Units in process beginning inventory 1,200
Units received from the Department 1 8,000 9,200
Units completed and transferred to next department 7,800
Units still in process 1,000
Units lost in process 400 9,200

Cost charged to the department

Work in Process, beginning inventory (P13,200 + P6,000) P 19,200

Cost from preceding department

Transferred in during the period 91,200 P12.00

Cost added during the period:

Conversion cost 60,000 8.00

Total cost to be accounted for P170,400 P20.00

Cost accounted for as follows

Cost completed and transferred to the next department:

From Beginning inventory:
Inventory cost P19,200
Conversion cost added (1,200 x 1/3 X P8.00) 3,200
P 22,400
From current product (6,600 x P20.00) 132,000
P154,400

Work in process, ending inventory:

Adjusted Cost from preceding department (1,000 x P12) P 12,000
Conversion Cost ( 1,000 x ½ x P8.00) 4,000 16,000
Total cost accounted for P170,400

Additional Computation
Adjusted cost from the preceding department
P91,200/ (8,000 units – 400 lost units) = P12.00

Equivalent Production
 Work in Process Beginning inventory 1,200 (1 – 2/3 completed work last period) 400
Started and completed this period (7,800 – 1,200) 6,600
Work in process ending inventory 1,000(1/2 completed this period) 500
Equivalent Production 7,500

Unit cost:
Conversion P60,000/7,500 = P8.00

Summary of the Lesson

 The work in process inventory costs remain to be separated from the current cost incurred by
the department.
 The degree of completion for both work in process beginning and ending are considered.
 The cost transferred to the next department will be coming from: (1) the work in process
beginning inventory plus additional cost added and (2) current production, which are the one
started and completed during the period.

Enrichment Activities

At the beginning of September, the Elly Corporation had P27,950 (direct materials – P7,800,
conversion cost – P20,150) in Department A’s beginning work in process inventory. The inventory
consisted of 15,500 units which had 100% of direct materials and 65% of conversion cost. During
September, 36,000 units were started in process. Cost incurred during the month were: direct
materials – P54,000; conversion costs P79,000. As the 48,000 units were completed, they were
immediately transferred to Department B. At the end of September, 3,500 were still in process and are
100% complete as to materials and 45% converted.

Required: Cost of production report using fifo method.

Assessment
 Consider the following data for the Assembly Department of Pink Manufacturing Company:

Quantity: Work in Process - May 1 80

Started in May 202A 500
Completed during May 202A 460
Work in Process – May 31, 202A 120

Stage of Completion: Work in Process May 1 Work in Process May 31

Materials 90% 60%
Conversion costs 40% 30%

Cost Data Materials Conversion Cost

Work in Process – May 1 P 49,336 P 9,104
Cost added during May 322,000 139,200

The Assembly department uses the fifo method of process costing.

Required: Cost of production report for the month of May.

Suggested Links

1. https://xplaind.com/287240/process-costing-fifo

References
1. De Leon (2019), Cost Accounting and Control 2019 Edition: Manila GIC Enterprise & Co., Inc (Text Book).
2. Rante (2013) Cost Accounting 2013 Edition : Manila: Millenium Books Inc.
3 Cabrera, M. E. B. (2019) Cost Accounting and Control 2019 Edition) Manila: GIC Enterprise & Co. Inc.

Lesson Number 3
Lesson Title Joint Product Costing

Lesson Objectives : At the end of the lesson, the student is expected to

1. Discuss and illustrate different methods of cost allocation methods for joint products
2. Compute product cost of the joint products considering allocated cost and identifiable
cost
3. Determine the cost of goods sold and gross profit of the joint products

Getting Started (Optional)

Product A

Product B

Product C

Cost before Split off Cost after Split off

Split off point

As seen in the illustration, Products A, B and C are processed in one common process incurring
common costs (joint costs, cost before split off, costs before separation ), which will be allocated to the
productc. There is a point that they separate and incur separable costs (costs after split off, separable
costs, cost to further process, identifiable costs).

Discussion and Application

Assigning cost to products is required for inventory costing for income determination and financial
statement purposes By product and joint product costing shall provide data that may be beneficial to
attain maximum profit and evaluating actual performance.

Joint costs are costs incurred in the common processing of products, which may be are joint
products or by products, from the same process. A joint cost is incurred before the products separate
and become identifiable. Thus, this cost should be allocated to the products produced. However, the
costs after separation are identifiable with the individual products which are no longer allocated.

Joint products are products that are produced simultaneously in one or more than common
processes. There is a point that they split off and will be processed individually. They have relative
sales value. They are also termed as main products.

Thus, there are two kinds of costs namely:

1. Joint costs or cost before split off or cost before separation or cost before further
processing. These shall be allocated by using different methods. The total product cost
 is the sum of joint cost allocation plus the cost after split off. This will determine the
inventory costs, cost of goods manufactured and sold and gross profit.

2. Cost after split off or cost after separation or further processing costs. Since these are
identifiable costs, they need not be allocated.
Methods of Allocating joint costs to joint products:

1. Physical output method/ average unit cost method

2. Market value at split off method
3. Net realizable value method or hypothetical market value or estimated market
value at split off.

Physical Output Method

The quantity of output produced will be the basis for allocating the joint costs. The formula to get
the joint cost allocation will be : Joint Costs/ total output = the joint cost per unit multiplied by the
units produced for each product.

Market Value at Split Off Method

When the market value at split off is known and reliable, it may be used as a basis for allocation.
We have to compute the total market value of the products at split off. The total joint cost divided by
the total market value will equal the percentage cost ratio of the two variables. This percentage ratio is
multiplied to the total market value of the individual product to compute the share in the joint cost.

Net Realizable Method

If there is no available market value at split off point, we have to estimate it by using the net
realizable value method.

The estimated market value is equal to the Final Sales Value less the (further processing plus cost
disposal cost).

Then the estimated market value will be used to allocate the joint cost as discussed in the market
value at split off method.

Illustration:
 Helen Corporation manufactures products, W, X, Y and Z from a joint process. Additional
information follows:
Market If Processed Further
Units Value at Additional Market
Product Produced Split Off Cost Value
W 6,000 P80,000 P7,500 P90,000
X 5,000 60,000 6,000 70,000
Y 4,000 40,000 4,000 50,000
Z 3,000 20,000 2,500 30,000
Total 18,000 P200,000 P20,000 P240,000

Total joint cost incurred was P160,000.

Required: Round you answer to whole number.

1) Joint cost allocation if cost will be allocated using (a) physical output method (b) market value at
Split off point (c) net realizable value method

2) If 80% of the units produced sold and using market value at split off method of allocating joint
Cost, compute for the (a) ending inventory (b) cost of goods sold and (c) gross profit
Assume no beginning inventory.

1. (a)Physical output method

Units Joint Product

Produced Cost W 6,000 P53,280
X 5,000 44,400 Y
4,000 35,520 Z 3,000
26,800 Total 18,000 P160,000

Joint cost per unit = Joint cost/total units produced

P160,000/18,000 = P8.88

1. (b) Market value at split off

Market
Units Value at Joint
Product Produced Split Off Cost
 W 6,000 P80,000 P64,000
X 5,000 60,000 48,000
Y 4,000 40,000 32,000
Z 3,000 20,000 16,000
Total 18,000 P200,000 P160,000

*Cost percentage of Joint cost to market value at split off

= Total joint cost/total market value
= P160,000/P200,000
= 80%
*To be multiplied to the market value at split off

1. (c) Net Realizable Method

Final *Estimated
Market Additional Market Value Joint
Product Value Cost at Split Off Cost
W P90,000 P7,500 P 82,500 P 60,002
X 70,000 6,000 64,000 46,547
Y 50,000 4,000 46,000 33,456
Z 30,000 2,500 27,500 19,995
P240,000 P20,000 P220,000 P160,000

* Final Market value – Additional Cost

**Cost percentage of joint cost to estimated market value at split off
= Total joint cost/estimated total market value at split off
= P160,000/P220,000
= 72.73%
**To be multiplied to the estimated market value at split off

2. (a) Ending Inventory

Units Joint Additional Product Unit Ending Ending
Product Produced Cost Cost Cost Cost Units Invty Inventory
W 6,000 P64,000 P7,500 P71,500 P11.917 1,200 P14,300
X 5,000 48,000 6,000 54,000 10.80 1,000 10,800
Y 4,000 32,000 4,000 36,000 9.00 800 7,200
 Z 3,000 16,000 2,500 18,500 6.167 600 3,700
P160,000 P20,000 P180,000 P36,000

Product cost = Joint cost + additional cost

Unit Cost = Product cost/ units produced
Ending Inventory in units = Units produced x 20% (100% - 80% units sold)
Ending inventory value = Ending inventory in units x unit cost

2. (b) Cost of goods sold (assuming no beginning inventory)

Product Product Cost Ending Inventory Cost of goods sold

W P71,500 P14,300 P57,200
X 54,000 10,800 43,200
Y 36,000 7,200 28,800
Z 18,500 3,700 14,800
P180,000 P36,000 P144,000

Cost of goods sold = Product Cost – Ending inventory

Product cost is the cost of goods manufactured

2. (c) Gross Profit

Final Cost
Market of Goods Gross
Product Value Sold Profit
W P72,000 P57,200 P 14,800
X 56,000 43,200 12,800
Y 40,000 28,800 11,200
Z 24,000 14,800 15,200
P192,000 P144,000 P 48,000

Gross Profit = Final Market Value – Cost of goods sold

Summary of the Lesson

 Joint costs are costs incurred in the common processing of products, which may be are joint
products or by products, from the same process
  Joint products are products that are produced simultaneously in one or more than common
processes.
 The total product cost is the sum of joint cost allocation plus the cost after split off. This will
determine the inventory costs, cost of goods manufactured and sold and gross profit.
 Methods of Allocating joint costs to joint products:
Physical output method/ average unit cost method
Market value at split off method
Net realizable value method or hypothetical market value or estimated market
value at Split off.

Enrichment Activities

Problem 1 The company produces four joint products, which have a manufacturing cost of P434,000 at
split off point. Data pertaining to these products are as follows:

Product Market Value at Split off Units Produced

A P4.00 20,000
B 1.75 32,000
C 3.00 36,000
D 2.75 24,000

Required: Allocate the joint cost using (a) Market value method (b) Average unit cost method

Problem 2 The Moonlight Company produced three joint products at a joint cost of P264,000.
Additional information for a recent period is as follows:
Sales value and Additional
Processing if processed
Product Sales Value at Split off Units Produced Sales Value Add’l Cost
A P88,000 13,200 P121,000 P19,800
B 77,000 8,800 99,000 15,400
C 55,000 4,400 66,000 11,000

Required: Allocate joint costs using: (a) Physical unit method

(b) Net realizable method

Assessment
 Bayer Chemicals manufactures three kinds of chemicals. Total joint costs to be allocated among
these chemicals amounted to P60,000. The following are pertinent data regarding these chemicals.

Product Units in Sales Price Separate Cost Final Sales

Output At Split Off After Split Off Price

Chemical 1 7,500 P3.00 P1.00 P4.25

Chemical 2 10,000 P2.00 P0.50 P3.00

Chemical 3 12,500 P2.00 P0.75 P3.00

1. Allocation of joint cost to the joint products using: (1) average unit cost method (2) market
value at split off method (3) net realizable value method

2. Using the average unit cost method, if 75% of the units output were sold and no beginning
inventory, compute for the following (1) ending inventory (2) cost of goods sold (3) gross profit.

Suggested Links

1. https://kfknowledgebank.kaplan.co.uk/joint-and-by-product-costing-

References
1. De Leon (2019), Cost Accounting and Control 2019 Edition: Manila GIC Enterprise & Co., Inc (Text Book).
2. Rante (2013) Cost Accounting 2013 Edition : Manila: Millenium Books Inc.
3 Cabrera, M. E. B. (2019) Cost Accounting and Control 2019 Edition) Manila: GIC Enterprise & Co. Inc.

Lesson Number 4

Lesson Title By Product Costing

Lesson Objectives : At the end of the lesson, the student is expected to:

1. Discuss and illustrate the options involved in allocating costs to by products

2. Prepare income statement showing different treatments for the revenue from by product if
joint cost is not allocated.
3 Determine the joint cost to be allocated to by product using the reversal cost method
4. Prepare income statement showing revenues from main product(s) and by product(s)

Discussion and Application

Joint costs are costs incurred in the common processing of products, which may be are joint
products or by products, from the same process.

By products are just a consequence in processing the main product(s). They just have a low sales
value as compared with the main product(s).

There are two options that may be done regarding the joint costs incurred during the process.

1. Joint cost may not be allocated to the by product. However, sales from the by product may be
treated as (a) additional sales revenue (b) deduction from cost of goods sold (c) Other income
(d) deduction from the total manufacturing cost
2. Joint cost may be allocated to by product if the by product income is significant and considered
important by the management. There are two methods namely (a) net realizable value method
(b) reversal cost method

Illustration:

Blue Company produces product XY from a process that also yield a by product Z. The by product
requires P4,000 additional processing cost. The company decided to charge the joint cost to XY. The by
product will required selling and administrative of P1,000. Information concerning a batch produced in
January of the current year follows:
 Product Units Produced Market Value at Split Off Units Sold
XY 50,000 P10.00 40,000
Z 20,000 1.00 15,000
The costs incurred up to the split off point are:
Direct Materials P120,000
Direct Labor 100,000
Factory Overhead 80,000

Required: Income statements showing the net revenue of the by product treated as (a)
additional sales revenue (b) deduction from cost of goods sold (c) Other income (d) deduction from the
total manufacturing cost

1. Joint cost not allocated to the by product

1.a Sales(net revenue) from by product treated as additional sales revenue

Sales: Main Product P400,000

By Product 10,000 P410,000
Less: Cost of Goods Sold:
Direct Materials P120,000
Direct Labor 100,000
Factory Overhead 80,000
Total Manufacturing cost P300,000
Less: Inventory, January 31 60,000 240,000
Gross Profit P170,000
Less: Selling and Administrative expenses 80,000
Net Income P 90,000
The net revenue from the by product is computed as follows:
Sales P15,000
Less: Additional processing cost P4,000
Selling and Administrative 1,000 5,000
Net Revenue of by product P10,000

Inventory January 31 300,000/50,000 x 10,000 (unsold units) = P60,000

1. b Sales (net revenue) from by product deduction from cost of goods sold

Sales: Main Product P400,000

Less: Cost of Goods Sold:

Direct Materials P120,000
Direct Labor 100,000
 Factory Overhead 80,000
Total Manufacturing cost P300,000
Less: Inventory, January 31 60,000
Cost of goods sold P240,000
Less: Revenue from by product 10,000 230,000
Gross Profit P170,000
Less: Selling and Administrative expenses 80,000
Net Income P 90,000

1.c Sales (net revenue) from by product treated as other income

Sales: Main Product P400,000

Less: Cost of Goods Sold:

Direct Materials P120,000
Direct Labor 100,000
Factory Overhead 80,000
Total Manufacturing cost P300,000
Less: Inventory, January 31 60,000 240,000
Gross Profit P160,000
Less: Selling and Administrative expenses 80,000
Net Operating Income P 80,000
Add: Revenue from by product 10,000
Net Income P 90,000

1.d Sales (net revenue) from by product deduction from total manufacturing cost

Sales: Main Product P400,000

Less: Cost of Goods Sold:

Direct Materials P120,000
Direct Labor 100,000
 Factory Overhead 80,000
Total Manufacturing cost P300,000
Less: Revenue from by product 10,000
Net manufacturing cost P290,000
Less: Inventory, January 31 58,000 232,000
Gross Profit P168,000
Less: Selling and Administrative expenses 80,000
Net Income P 88,000

Inventory January 31 P290,000/50,000 x 10,000 (unsold units)P58,000

Note: All three presentations (1.a, 1.b, 1.c) resulted in the same amount of net income. The
presentation in the income statement will not affect the amount of net income. It is only in case 1.d
that the net income is affected because of the total manufacturing costs was decreased and as a result,
the cost of inventory of the main product was affected. This caused the net income to decrease.

2. Joint costs allocated to by product

Maxwell Company manufactures product AB from a process that also produces by product X and Y.
The following data pertain to operations for April of the current year.

AB X Y Total

Unit produced 10,000 6,000 4,000 20,000

Sales price per unit P20.00 P3.00 P2.75

Units sold 8,000 6,000 4,000 18,000

Subsequent cost P62,300 P5,700 P4,300 P72,300

Operating expenses P32,000 P2,500 P1,000 P35,500

Desired Profit P2,000 P1,200

Required:

1. Share of the by products in the joint cost of P50,000 using reversal cost method.
2. Net income for the main product and the by products.

1. Share of the by products in the joint cost

X Y

Sales P18,000 P11,000

Less: Manufacturing Cost
Cost before Separation P 7,800 P 4,500
 Cost after Separation 5,700 4,300
Total Manufacturing Cost P 13,500 P 8,800
Gross Profit P 4,500 P 2,200
Less: Operating expenses 2,500 1,000
Desired Profit P 2,000 P 1,200

Steps to compute share of the by products in the joint cost.

1. Add the desired profit and the operating expenses to get the gross profit.
2. Deduct the gross profit from sales to arrive at the total manufacturing cost.
3. Deduct from the total manufacturing cos the cost after separation to compute
the estimated share in the joint cost of the by products.

2. Net income for the main product and the by products

AB X Y Total

Sales P160,000 P18,000 P11,000 P189,000

Less: Cost of goods sold
Manufacturing Cost
Cost before Separation P 37,700 P 7,800 P 4,500 P 50,000
Cost after Separation 62,300 5,700 4,300 72,300
Total Manufacturing Cost P100,000 P 13,500 P 8,800 P122,300
Less: Ending inventory 20,000 0__ 0__ 20,000
Cost of goods sold P 80,000 P 13,500 P 8,800 P102,300
Gross Profit P 80,000 P 4,500 P 2,200 P 86,700
Less: Operating expenses 32,000 2,500 1,000 35,500
Net Profit P 48,000 P 2,000 P 1,200 P 51,200

Steps to compute net income

1. Share of the main product in joint cost = P50,000 – (P7,800 + P4.500)
2. Ending inventory = 2,000 units x (P100,000/10,000 units) = P20,000
3. Having all the necessary figures, the income can be computed.

Summary of the Lesson

 By products is just a consequence in processing the main product(s).
 Joint cost may be allocated or not allocated. It is the management to decide on how the
joint cost will be treated related to by product.

Enrichment Activities

The Laguna Manufacturing Company produces a product known as “Strawberry” from which by
product results. This by product can be sold at P1.00 a pound. The manufacturing costs of the main
product and by product up to the point of separation for the three month period ending March 31 of the
current year follows:
 Materials P30,000
Labor 17,400
Overhead 17,400

The units processed were 20,000 pounds of the main product and 2,000 pounds of the by product.
During the period 18,000 pounds of the main product were sold at P10.00 a pound and 1,000 pounds of
the by product. Selling and administrative expenses applicable to the main product is 30% of sales.

Required: 1. Income statements assuming that the sales of the by product is treated as income, using
the different methods
2. Income statement assuming that the sales of the by product is treated as reduction o f the
production cost of the main product.

Assessment

Fisher Company manufactures one main product and two by products, A and B. For April, the
following data are available.

By Product____
Main Product A B
Sales P75,000 P6,000 P3,500
Manufacturing cost after separation 11,500 1,100 900
Marketing and administrative expense 6,000 750 500

Manufacturing cost before separation totaled P37,500. Profit allowed for A and B is 15% and 12%
respectively.

Required:
1. Compute the manufacturing cost before separation for by products A and B using the market
value (reversal cost) method.
2. Prepare income statement (showing details for sales and costs for each product)

Suggested Links:

1. https://kfknowledgebank.kaplan.co.uk/joint-and-by-product-costing-

References
1. De Leon (2019), Cost Accounting and Control 2019 Edition: Manila GIC Enterprise & Co., Inc (Text Book).
2. Rante (2013) Cost Accounting 2013 Edition : Manila: Millenium Books Inc.
3 Cabrera, M. E. B. (2019) Cost Accounting and Control 2019 Edition) Manila: GIC Enterprise & Co. Inc.